Egypt sees sustained demand in residential, commercial and retail space

Recent macroeconomic trends – particularly the depreciation of the Egyptian pound and the foreign currency shortage – reflected both positively and negatively on Egypt’s real estate market throughout 2016, resulting in mixed results and predictions across the sector. In March 2016 the Central Bank of Egypt made the decision to devalue the Egyptian pound by 14.5% to historically low levels in an attempt to incentivise more foreign investment and stabilise the volatile economic climate. After being floated in November 2016, the pound fell further and ended the year at LE0.055:$1. The situation was felt across all sectors, but it had a particular impact on the real estate market. On the one hand, investment in property continues to be a relatively stable bet in uncertain times. On the other hand, the depreciation of the Egyptian pound resulted in increased construction costs for imported materials and corresponding delays, diminished the amount of disposable income for the population and made profit generation an increasing challenge for the retail segment.

Currency Fall

The effects of the devaluation and subsequent float have been varied so far, but it has caused a boom in the housing market as people consider residential real estate one of the few remaining stable investments. Palm Hills Developments’ Palm Valley project in West Cairo, for example, sold all units within 48 hours of its launch, raising a total of LE491m (equivalent to $26m as of December 2016).

Amany Sadek, senior research and business development executive at Business to Business for Investment & Real Estate Marketing (B2B), a local commercial and residential real estate firm, told OBG that property is still seen as one of the safest investments given the uncertainty of future currency valuation (see analysis).“People feel they should be putting their money in real estate when there is political or economic instability, because it is something that you can guarantee,” adding, “In Egypt now, the function of real estate as value storage has been greatly magnified because of the uncertainty of the pound.” The drop in the currency’s value resulted in a corresponding increase in some planned first sale prices. NematAllah Choucri, co-head of research and senior real estate analyst at regional investment bank HC Securities, told OBG that the firm expects developers to factor the depreciation into their sale prices with a hike of 7-10%. Palm Hills Developments had done this by mid-2016, for example, but demand has remained high nonetheless.

Residential Markets

Due to Greater Cairo’s burgeoning population of more than 20m – roughly a quarter of Egypt’s total population of approximately 92m – demand for housing in the capital area continues to outstrip supply. The city’s population is growing at an average rate of 2% per year, while housing supply is rising by around 1% annually.

With approximately 50% of the city’s residents between the age of 15 and 40, marriages are also a significant factor contributing to demand, as many young people seek homes of their own. Magued Sherif, managing director of SODIC, explains this trend: “In Egypt, couples usually own a home before getting married. The country’s estimated 900,000 weddings per year are thus a major driver of demand in the housing market; housing units are selling as fast as they can be built, with pre-sales for developers as high as 70-80%,” he told OBG.

The year 2015 saw significant price increases because of the strong demand, but rental growth was slowing by the end of the year, and rents and sales declined throughout 2016. A 2016 report from global real estate management company JLL noted that average residential sales declined by 40-50% year-on-year in most areas of the Cairo market. Despite this slowdown in unit sales, developer confidence remains fairly high, a reflection of continued elevated demand in many segments of the real estate sector.

In terms of construction, 7560 residential units were delivered in 2015, roughly 6000 of which were built by the largest developers. This was down from 2014, which posted strong results, with 15,000 units completed in the fourth quarter alone. This led developers to project that around 30,000 units would come to market in 2015, corresponding with 14% of Cairo marriages – a data point meant to serve as a proxy for new home demand. However, the market corrected itself in 2015; volumes dropped by 25%, corresponding to 10.5% of Cairo marriages. The year 2016 brought the delivered figure up again to about 13,000 newly completed units.

Affordable & Low-Income Housing

While developments targeting the wealthy grab the most headlines and billboard space, there are many Egyptians with lower real estate budgets who are in need of quality, affordable housing. Based on recent estimates from the World Bank, between 12m and 20m people in Egypt still live in informal housing.

According to commercial real estate firm Colliers International, 52% of Greater Cairo households have a budget for units priced between $26,000 and $35,000 based on resident income levels, whereas luxury development properties can sell for more than five times that amount. Colliers provided an example of a 130-sq-metre apartment in the relatively less expensive 6th of October City, which can sell within the range of $60,000 to $65,000. These apartments have the potential to capture just 13% of Greater Cairo households. In higher-end developments like Cairo Festival City and Uptown Cairo, properties are affordable to only 0.2% of total households in Cairo.

In May 2016 President Abdel Fattah El Sisi renewed his commitment to end the problem of informal housing in Egypt within two years of the launch of a housing project in Cairo’s Moqattam neighbourhood. The project in Moqattam, financed in part by the government’s Tahya Masr Fund (“Long Live Egypt” in Arabic) is supposed to provide 16,000 new housing units for low-income citizens. According to press reports at the time, President El Sisi’s administration stated there was LE61bn ($3.2bn) in funding for this initiative in FY 2016/17 composed of revenue from land sales, World Bank financing and other loans. The spokesman for the Ministry of Housing, Utilities and Urban Development, Hany Younis, said these funds are enough to complete the nearly 400,000 units still needed to meet the target set by President El Sisi of 656,000 new units by the end of April 2017.

Development finance institutions have sought to play a larger role in the segment. The Participatory Development Programme in Urban Areas allocated $ 51m for the development of nine ashwa’iyyat ( informal or “random” housing areas in Arabic) in three governorates. The funds come from the EU, GIZ, and the Bill and Melinda Gates Foundation.

Commercial Segment

The supply of commercial office space in Egypt, and Cairo in particular, maintained steady growth in 2016. As of mid-year, the country had approximately 941,000 sq metres of gross leasable area (GLA), according to JLL.

There are plenty of projects in the pipeline, most notably in the new master-planned developments to the east and west of downtown. While just 37,000 sq metres of office space was added over the course of 2016, five new spaces with a total of 60,000 sq metres are planned to come on-line in 2017. Of total office supply, a 2015 CBRE report estimated that 40% is located in the New Cairo business districts.

With regard to rental price, 2016 year-end prices ranged from $240 per sq metre in west Cairo to $420 in central Cairo. As with residential properties, office space outside the centre is more affordable; although, according to JLL, those suburban neighbourhoods have also seen upward pressure on rents in recent years. Greater affordability along with newer infrastructure and less congestion has attracted small and medium-sized enterprises to neighbourhoods such as 6th of October City in the Greater Cairo area.

B2B’s Sadek also emphasised that office space for smaller enterprises is in increasingly high demand, particularly because the stock of smaller offices is much lower compared to that of large offices. Sadek told OBG, “Recently, there have been a lot of start-ups. A lot of university graduates want to create their own businesses instead of working in corporate life, but these small companies can’t afford to buy 2000 sq metres of office space.”

Retail Market

Retailers operating in the country have been especially challenged as a result of the plunging value of the Egyptian pound. Yasmin ElMahdy, a senior retail analyst at JLL, told OBG that depreciation has hurt companies by making them unable to transfer the necessary funds to pay for imports priced in foreign currency. Added to this, the resulting inflation has limited how far Egyptians’ salaries can stretch. This was reflected in the fact that no additional retail space was completed in 2016, leaving the current supply standing at 1.3m sq metres, according to the JLL full-year report.

However, looking forward, there are a number of major projects under way, particularly the 150,000-sq-metre Mall of Egypt, which is expected to open in the first quarter of 2017 barring any further construction delays. Meanwhile, the completion of the Madinaty Mega Mall has been pushed back to 2018. Egypt will also see three more malls located in the New Administrative Capital, Ain Sokhna and Tanta, according to an announcement by Alhokair Group, at an investment cost of LE9bn ($477m).

In spite of a smaller pipeline and broader headwinds facing retail, returns in the segment are fairly stable. Average retail rentals were recorded at $1600 per sq metre per annum during 2016. HC Securities’ Choucri noted the high potential value of retail real estate investments, stating, “Based on our estimates, a sq metre of retail space has a higher value compared to residential by 3-3.5 times.”

Health Care

The “Cairo Market Overview 2016” report from Colliers International shined a spotlight on the health care real estate market, estimating that Egypt will require an additional 35,000 beds over the next 10 years based on the current bed-to-population ratio – with Cairo alone requiring 7000 beds. According to report calculations, this means that meeting the demand in Cairo requires the construction of an additional four to five hospitals per year for the next 10 years, as well as 500,000 sq metres of clinic space, to accommodate the estimated 1100 new doctors needed in the capital by 2025.

This rising demand for real estate in the medical sector can be seen in the proliferation of small clinics in complexes regulated by developers. The master-planned nature of new developments makes the establishment of clinics easier, as these medical facilities face more hurdles when looking to open up in existing areas that are zoned for residential use.

Mortgages

Egypt’s lack of a large or comprehensive mortgage market means that home down payments are financed by savings, often comprising 30-40% of monthly salaries. Mohamed Younis, general manager at Roots Real Estate Development, told OBG, “Egypt is still predominately a cash market when it comes to residential real estate. Customers either pay 100% up front or provide a 20-30% down payment with a four-year payment plan.” Real estate companies have come to fill the mortgage market gap by offering payment schemes allowing people to make payments over a period of up to 10 years.

Still, this solution by real estate companies is not enough, and there is a visible gap where a more robust mortgage market could significantly help the sector. Khalid Bahig, vice-president and CEO of Coldwell Banker New Homes, agrees. “The development of mortgages will definitely boost the real estate sector. For this to take place, though, there needs to be some regulatory reforms, specifically for the registration of properties,” he told OBG. It is illegal for companies to finance unregistered units, and 90% of units in the market are not properly authorised due to the cumbersome registration process.

Some industry players have expressed concerns about a housing bubble, given the construction frenzy and uncertain economic climate. “Sales for New Cairo may eventually face a bubble, but we expect the growth in prices will continue for at least the next 10 years,” Mohamed Hammad, general manager at Byotat, told OBG. According to Choucri, a bubble is not supported by the data, given the current level of demand and little to no oversupply. He explained that while banks were financing real estate purchases in most countries that have suffered from this type of real estate bubble in recent history, developers in Egypt finance projects through off-plan sales and unleveraged balance sheets.

Land & Bureaucracy

Despite the relative strength of the sector in terms of demand and construction, the real estate market continues to face a number of challenges, primarily in the categories of land replenishment and bureaucracy.

Speaking to local press in January 2016, Daker Abdallah, a member of the Egyptian Businessmen’s Association and the Egyptian Federation for Construction and Building Contractors, identified slow government bureaucracy as the biggest obstacle to the timely completion of quality construction projects. Indeed, as stated in the World Bank’s “Doing Business 2017” report, both the number of procedures required obtain a construction permit (17) and the average number of days this takes (145) are higher in Egypt than in the rest of the MENA region, which has an average of 15.1 procedures and 129.5 days.

Choucri likewise cited land acquisition as another one of the most pressing challenges currently facing the real estate sector. To acquire land prior to 2015, the government operated a closed auction system, ultimately offering land to the company with the highest bid. Starting in 2015 the auction system was First, there is a lottery system whereby the government offers small land plots at predetermined, and often high, prices. However, demand in this venue has been low, and of 64 plots recently publicised, less than 10 were sold and the option had to be extended due to lack of interest. The second way to purchase land is a revenue-sharing model through which the government gets a percentage of cash revenue. Some benefits of this system are the minimisation of cash outlays and decreased risk in case of an industry downturn. However, Choucri noted that only four agreements have been signed to date due to the numerous and time-consuming bureaucratic hurdles, which will hopefully lessen with practice.

Both of these concerns were raised during the first session of the Cityscape conference in April 2016, Egypt’s largest gathering of home seekers and real estate professionals. A number of real estate investors operating in the country highlighted the key barriers to growth in the real estate market, and at the top of the list were the increases in land prices and the obstacles caused by the legislative structure when it comes to establishing trusts.

Gulf Developers

As the private sector becomes more active in Egypt’s real estate needs, GCC developers are taking a leading role, with several projects announced or started in 2016.

In March 2016 Capital Group Properties, owned by Abu Dhabi Capital Group, launched Alburouj, its first project in the Egyptian market, with a total investment of LE40bn ($2.1bn). The 490-ha project is planned to consist of residential, commercial and retail units between the city of Suez and the Ismailia Desert road. According to press reports, Egyptian developer Mountain View entered into a joint venture with Saudi Arabia’s Sisban Holding for the construction of the $2.6bn Mountain View I City in May 2016. The development will include 2 sq km of apartments between 100 and 500 sq metres each.

In addition, Dubai-based HMG Properties launched a luxury development in Sharm El Sheikh in 2015, with the CEO, Raed Bourjass, expressing optimism. “As Egypt becomes a magnet for foreign investment, the luxury residential sector is growing in cities such as Sharm El Sheikh. While tourism is the main economic driver of the city, we believe that in the years to come, real estate here will appreciate faster than any other city in the country,” he said. According to local press, HMG is also planning new projects in Cairo, Alexandria, Aswan, Luxor and Hurghada.

According to Choucri, Dubai’s Emaar Misr for Development has the second-largest backlog of properties – worth LE21.5bn ($1.1bn) – of the top-seven largest developers, who together account for 54% of the market for construction of upper-middle class and luxury residential units by volume. Egypt’s Talaat Moustafa Group reported the largest backlog as of the first quarter of 2016, at LE21.6bn ($1.1bn). Although these figures indicate delays in construction, they also illustrate the intention of regional companies to continue building in Egypt.

Outlook

Despite some economic setbacks and continued legislative hurdles, there is reason for optimism in the country’s real estate sector. While growth rates may have slowed for the moment, and foreign currency shortages have delayed some projects, demand remains strong and housing needs across the income spectrum must be met. “In an economy where the currency is depreciating, people invest in real estate because they see it as something ‘real’ and a safe investment,” Manish Mehra, regional head, Middle East and Egypt, of Asian Paints (SCIB), told OBG. As the government continues to facilitate investment, the future looks promising for the sector.

 

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The Report: Egypt 2017

Real Estate chapter from The Report: Egypt 2017